Fitch Affirms AES El Salvador Trust II at 'BB'; Outlook Negative

MONTERREY, Mexico--()--Fitch Ratings has affirmed AES El Salvador Trust II's (AES El Salvador) foreign and local currency IDRs at 'BB'. The rating action applies to AES El Salvador's US$310 million senior unsecured notes due 2023. The Rating Outlook is Negative.

AES El Salvador is a special-purpose vehicle (SPV) located in Panama that was created to issue US$310 million of notes on behalf of AES El Salvador Group. AES El Salvador's ratings are based on the combined credit strength of the operating companies that guarantee its debt and reflect the group's strong market position, low business risk profile, and its predictable cash flow generation. The ratings also reflect the exposure to high regulatory risk and to sovereign risk through subsidies. A significant portion of AES El Salvador's cash flow generation comes from government subsidies, which exposes the company to El Salvador's creditworthiness and payment ability. The Negative Outlook reflects the Negative Outlook Fitch has on El Salvador's 'BB-' sovereign rating.

KEY RATING DRIVERS

LARGE MARKET POSITION AND LOW BUSINESS RISK

AES El Salvador's low business risk results from its stable customer base and predictable cash flows. Although distribution service territories are not exclusive and distributors are free to compete for customers, the risk of new competition is low. This is because distribution companies possess significant economies of scale that make it inefficient for more than one company to operate in any particular geographic area.

The ratings factor in the strong market position of AES El Salvador as the largest electric distribution group in the country. The group serves approximately 1.3 million customers and covers 80% of El Salvador's electricity distribution area. The group supplied 60% of the total energy demand in the country during 2014 (2013: 63%, 66% in 2012). AES El Salvador's operations are considered efficient compared with other distribution companies in the region. The group, on a consolidated basis, has reported energy loses of 9.32% as of December 2014 (2013: 9.22%).

HIGH EXPOSURE TO GOVERNMENT INTERVENTION

The ratings incorporate AES El Salvador's high exposure to regulatory risk and receipt of government subsidies. The Salvadorian government currently subsidizes residential users with a monthly consumption of 99 kilowatt hours (kWh) or less. The country's users connected to the distribution system with energy consumption of 99 kWh or less represent 66.2% of total users, which accentuate the importance of the government subsidies in the country. Additionally, the government implemented an extraordinary subsidy for users with consumption below 200 kWh. The permanence or modification of this extraordinary subsidy is reviewed quarterly by the government. The state owned utility company, Comision Ejecutiva Hidroelectrica del Rio Lempa - (CEL), has been providing the funding for these subsidies.

AES El Salvador received subsidies of approximately US$136.1 million in 2014 and US$136.9 million in 2013, which have been paid in a timely fashion. Approximately 87% of AES El Salvador's residential customers received subsidies. Although the government has been paying subsidies in a timely manner, payment delays or a significant extension of the collection period may impact AES El Salvador's financial profile and pressure the ratings.

STRENGTHENING CREDIT FUNDAMENTALS SUPPORTED BY TARIFF STRUCTURE

AES El Salvador's credit profile is supported by its stable and predictable cash flow generation and strengthening credit metrics as result of higher EBITDA levels as outcome of the tariff reset for the 2013-2017 period. Fitch considers that although the new methodology is positive for the issuer, it continues to be exposed to government intervention.

Financial figures as of 2013 were restated as result of changes in accounting policies and the review of estimates. The main change is the adjustment in account receivables based on the review of the mechanism to estimate the energy consumed by customers during the days between the closing day billing and the end of the month. EBITDA was affected by this non-recurrent adjustment for approximately US$8 million. AES El Salvador reported a revised EBITDA of US$77.6 million as of December 2013, and a debt/EBITDA leverage ratio of 3.9x.

Year-end figures as of 2014 show relatively flat variation of figures in comparison to 2013. As of December 2014, total EBITDA reported is US$76.9 million and leverage ratio of 3.9x. Fitch expects AES El Salvador will maintain a leverage ratio below 4x during 2015-2017 (absent of new debt or changes in the operating environment).

ADEQUATE LIQUIDITY

AES El Salvador's liquidity is supported by its cash on hand, which as of year-end 2014 was US$21.5 million approximately (2013: US$32.7 million), and US$53.5 million short-term bank credit facilities to buy electricity from generators. Historically, AES El Salvador has been able to access bank and debt capital markets. The debt schedule (2023) contributes to the financial flexibility of the company. Liquidity could be affected in case of higher ageing account receivables. Should distribution companies be forced to issue additional debt to fund their working capital requirements, while they continue distributing dividends, their credit quality could deteriorate.

RATING SENSITIVITIES

--AES El Salvador's ratings could be negatively affected by any combination of the following factors: a sovereign downgrade will likely result in an immediate downgrade of one to two notches; deterioration of the operating environment resulting from regulatory changes that may impact working capital requirements and increase exposure to subsidies that in turn derives in increased leverage above 4x; liquidity deterioration due to energy costs not recovered through government subsidies; or further political or regulatory intervention that negatively affects the company's financial performance;

-- An upgrade is not likely in the near term due to the weakening macroeconomic conditions of El Salvador, and the strong reliance on government subsidies. AES El Salvador's ratings could be positively affected by improving macroeconomic conditions in El Salvador; a sustainable leverage reduction (below 3x); and regulatory stability.

KEY ASSUMPTIONS

Key assumptions within Fitch's rating case for the issuer include:

--Energy sales (GWh) growth of 1.0% from 2015 - 2018;

--AES El Salvador's distribution companies maintain its strong market share participation;

--No elimination of current subsidies. Government subsidies will continue to be paid in a timely manner;

--Capital Expenditures around US$35 million per year;

--Gross leverage around 3.5x in the next three years

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981159

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Contacts

Fitch Ratings
Primary Analyst
Alberto Moreno
Senior Director
+52 81 8399 9100
Fitch Mexico S.A. de C.V.,
Prol. Alfonso Reyes 2612,
Monterrey, N.L. Mexico
or
Secondary Analyst
Vanessa Villalobos
Associate Director
+506-2296-94-54
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1 312 368 2070
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alberto Moreno
Senior Director
+52 81 8399 9100
Fitch Mexico S.A. de C.V.,
Prol. Alfonso Reyes 2612,
Monterrey, N.L. Mexico
or
Secondary Analyst
Vanessa Villalobos
Associate Director
+506-2296-94-54
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1 312 368 2070
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com